What does reform mean for mortgages?

More supervision of lenders may be a good thing, but if it's too restrictive it could lead to fewer products.

The world financial crisis started with the mortgage market; so it's logical, when the Chancellor, George Osborne, announced his plans for reform of financial regulation, that greater supervision of home loans would be a central plank.

The idea is that with greater supervision of lender balance sheets by the new beefed-up Bank of England, under the governor, Mervyn King, never again will lenders be allowed to stretch their finances to breaking point in order to be able to lend more and more money.

In reality, if everything goes according to plan, top-of-the-market products such as Northern Rock's infamous 125 per cent Together mortgage and Bradford & Bingley's disastrous foray into buy-to-let should never be repeated. At least, that's the theory.

"Handing the powers to oversee lender balance sheets to the Bank of England makes sense because, under the old system, the Financial Services Authority faced a conflict of interest: it wanted to see responsible lending, but also wider consumer choice," Ray Boulger, technical manager at John Charcol, one of the UK's biggest brokers, says. "The FSA thought it could simply stand back and create consumer information, such as key facts documents, and trust borrowers to make the right decisions in terms of how much cash it is sensible to borrow. As we know, it didn't work," he adds.

However, the new system of the Bank overseeing lender balance sheets, while the new Consumer Protection Agency is charged with making sure the public are given a fair deal, could, according to some experts, tilt the balance towards ever more restrictive lending. "What mustn't happen is that we see arbitrary limits imposed such as a cap on the loan to value [LTV] lenders are allowed to offer or such tight criteria, dictated from upon high by the regulator, that means that the self-employed or those with variable incomes can't get a mortgage," James Cotton, mortgage specialist at mortgage broker London & Country, says.

These are concerns echoed by Mr Boulger: "We don't want innovation to be killed off by over-caution, particularly over LTVs. At present, the differential in cost and availability of mortgage products, if you have 10 or 30 per cent, is massive and that has to be addressed. We need more competitive higher LTV products, not fewer," he says.

Mr Boulger cites the example of Nationwide's negative equity mortgage as an example of a mortgage product that may not match the template for responsible lending, but is potentially a help. The Nationwide mortgage will lend up to 125 per cent of the property value but only for an existing customer in negative equity who wants to move house: "Sometimes borrowers, through no fault of their own, are placed in a poor situation and they need innovation to get out of it. It'd be unfortunate if plans for regulation of the mortgage market prevented lenders from being able to meet the genuine need of borrowers," says Steve Blore of Nationwide.

But a strict cap on LTVs is unlikely: "Labour rejected it and I can't honestly see a Conservative-led government going with such a restrictive idea. It is against free markets," Mr Boulger says. As for a potential cap on mortgage income multiples, Mr Cotton is sceptical this will happen: "Take the example of a trainee barrister or junior doctor. They may not be earning much today, but are very likely to be bringing in a big wage tomorrow. Should they have to wait to get on the property ladder?" Mr Cotton asks.

In last year's review of the mortgage market, the FSA banned self -certification loans and called for the imposition of affordability criteria. Mr Boulger suggests that, overall, the presence of a slightly more interventionist regulator, more focused on keeping lenders on the straight and narrow, may increase rather than reduce competition and the mortgages available: "If the money markets feel there is a fully functioning regulatory regime in place, then that may ease concerns about lending. This in turn could lead to an increase in the number of products available," Mr Boulger says.

"It's all about balance: how to ensure there is no repeat of the crisis while not choking the market and stopping consumers getting mortgages they can actually afford," Mr Cotton concludes.

Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Guru Careers: Pricing Analyst

    £30 - 35k: Guru Careers: We are seeking a Pricing Analyst to join a leading e-...

    SThree: Trainee Recruitment Consultant

    £20000 - £25000 per annum + OTE £45K YR1: SThree: At SThree, we like to be dif...

    SThree: Trainee Recruitment Consultant

    £20000 - £25000 per annum + competitive: SThree: Did you know? SThree is a mul...

    Guru Careers: C# Project Team Lead

    £55 - 65k (DOE): Guru Careers: A unique opportunity for a permanent C# Develop...

    Day In a Page

    Blundering Tony Blair quits as Middle East peace envoy – only Israel will miss him

    Blundering Blair quits as Middle East peace envoy – only Israel will miss him

    For Arabs – and for Britons who lost their loved ones in his shambolic war in Iraq – his appointment was an insult, says Robert Fisk
    Fifa corruption arrests: All hail the Feds for riding to football's rescue

    Fifa corruption arrests

    All hail the Feds for riding to football's rescue, says Ian Herbert
    Isis in Syria: The Kurdish enclave still resisting the tyranny of President Assad and militant fighters

    The Kurdish enclave still resisting the tyranny of Assad and Isis

    In Syrian Kurdish cantons along the Turkish border, the progressive aims of the 2011 uprising are being enacted despite the war. Patrick Cockburn returns to Amuda
    How I survived Cambodia's Killing Fields: Acclaimed surgeon SreyRam Kuy celebrates her mother's determination to escape the US

    How I survived Cambodia's Killing Fields

    Acclaimed surgeon SreyRam Kuy celebrates her mother's determination to escape to the US
    Stephen Mangan interview: From posh buffoon to pregnant dad, the actor has quite a range

    How Stephen Mangan got his range

    Posh buffoon, hapless writer, pregnant dad - Mangan is certainly a versatile actor
    The ZX Spectrum has been crowd-funded back into play - with some 21st-century tweaks

    The ZX Spectrum is back

    The ZX Spectrum was the original - and for some players, still the best. David Crookes meets the fans who've kept the games' flames lit
    Grace of Monaco film panned: even the screenwriter pours scorn on biopic starring Nicole Kidman

    Even the screenwriter pours scorn on Grace of Monaco biopic

    The critics had a field day after last year's premiere, but the savaging goes on
    Menstrual Hygiene Day: The strange ideas people used to believe about periods

    Menstrual Hygiene Day: The strange ideas people once had about periods

    If one was missed, vomiting blood was seen as a viable alternative
    The best work perks: From free travel cards to making dreams come true (really)

    The quirks of work perks

    From free travel cards to making dreams come true (really)
    Is bridge the latest twee pastime to get hip?

    Is bridge becoming hip?

    The number of young players has trebled in the past year. Gillian Orr discovers if this old game has new tricks
    Long author-lists on research papers are threatening the academic work system

    The rise of 'hyperauthorship'

    Now that academic papers are written by thousands (yes, thousands) of contributors, it's getting hard to tell workers from shirkers
    The rise of Lego Clubs: How toys are helping children struggling with social interaction to build better relationships

    The rise of Lego Clubs

    How toys are helping children struggling with social interaction to build better relationships
    5 best running glasses

    On your marks: 5 best running glasses

    Whether you’re pounding pavements, parks or hill passes, keep your eyes protected in all weathers
    Joe Root: 'Ben Stokes gives everything – he’s rubbing off on us all'

    'Ben Stokes gives everything – he’s rubbing off on us all'

    Joe Root says the England dressing room is a happy place again – and Stokes is the catalyst
    Raif Badawi: Wife pleads for fresh EU help as Saudi blogger's health worsens

    Please save my husband

    As the health of blogger Raif Badawi worsens in prison, his wife urges EU governments to put pressure on the Saudi Arabian royal family to allow her husband to join his family in Canada